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Home >> News >> LoanBlog >> November 2010

Rising “shadow inventory” could keep housing market down

November 27th, 2010

The “shadow inventory” of U.S. real estate rose to 2.1 million homes in August 2010, according to data from CoreLogic, a mortgage research firm. These numbers represent an 8-month supply of homes, compared to a 5-month supply, or 1.9 million homes, a year earlier.

Troubled home loans

Shadow inventory includes homes that are in foreclosure, homes that have mortgage loans that are at least 90 days past due, and real estate owned (REO) properties owned by mortgage lenders but not yet listed for sale. Shadow inventory usually is not included in official statistics about unsold properties. The visible supply of unsold inventory was 4.2 million units, unchanged from a year earlier.

The total supply of unsold homes at the end of August was 23 months, compared with 17 months a year earlier. Usually a supply of 6 to 7 months is considered normal.

“The weak demand for housing is significantly increasing the risk of further price declines in the housing market,” Mark Fleming, chief economist for CoreLogic, said in a statement. “This is being exacerbated by a significant and growing shadow inventory that is likely to persist for some time due to the highly extended time-to-liquidation that servicers are currently experiencing.”

Problems with shadow inventory

Homes included in shadow inventory may be difficult to sell even if they eventually are put on the market. They may be located in areas that have many distressed homes. The properties may need a lot of repairs before they can even be marketed properly.

Delinquent mortgage loans

Meanwhile, the delinquency rate for mortgage loans fell to a seasonally adjusted rate of 9.13 percent of all loans outstanding at the end of the third quarter of 2010, according to the Mortgage Bankers Association.

Michael Fratantoni, MBA’s Vice President of Research and Economics, said in a statement:

“Most often, homeowners fall behind on their mortgages because their income has dropped due to unemployment or other causes. Although the employment report for October was relatively positive, the job market had improved only marginally through the third quarter, so while there was a small improvement in the delinquency rate, the level of that rate remains quite high. As we anticipate that the unemployment rate will be little changed over the next year, we also expect only modest improvements in the delinquency rate.”

The delinquency rate includes mortgage loans that behind at least one payment but not in the process of foreclosure. The quantity of home mortgages that were in foreclosure fell to 4.39 percent in the third quarter, down from the previous quarter and down from a year earlier.

FTC rule cracks down on mortgage relief firms

November 19th, 2010

A new Federal Trade Commission (FTC) rule is aimed at cracking down on mortgage relief companies that make use deceptive practices. Some homeowners who are struggling financially have become victims of various mortgage relief scams that have proliferated during the housing crisis.

No advance fees for mortgage relief

The FTC rule makes it illegal for firms offering help with mortgage loans to collect advance fees before any services have been provided. Some companies that offer foreclosure rescue or loan modifications services have required homeowners seeking assistance to pay large sums of money upfront without delivering on their promises. Some of the companies claim that they are affiliated with the government and government programs that offer housing assistance.

“At a time when many Americans are struggling to pay their mortgages, peddlers of so-called mortgage relief services have taken hundreds of millions of dollars from hundreds of thousands of homeowners without ever delivering results,” FTC Chairman Jon Leibowitz said in a statement. “By banning providers of these services from collecting fees until the customer is satisfied with the results, this rule will protect consumers from being victimized by these scams.”

Documentation before collecting money

Now mortgage relief companies must provide written proof that a mortgage lender or servicer has agreed to make changes to a mortgage loan before any fees can be collected. Companies that offer help with mortgages also must inform consumers that they have the right to turn down an offer without paying any fees.

Mortgage relief firms also must disclose to consumers that:

  • They are not affiliated with or approved by the government
  • They are not affiliated with or approved by mortgage lenders
  • Mortgage lenders may not agree to modify home loans
  • If they tell customers to stop making payments on a mortgage, that they could lose their home and damage their credit

False claims about help with home mortgages

Mortgage relief companies also must refrain from making false claims about their services. Among those false claims are those that about the likelihood that customers will get the results they want, refund and cancellation policies, whether the company provides legal representation for consumers, and the amount of money a homeowner will save using the company’s services. The FTC rule also prohibits mortgage relief firms from telling consumers to stop communicating with their mortgage lenders or loan servicers.

Mortgage interest tax deduction could be history for some

November 13th, 2010

Millions of Americans take a tax deduction for their mortgage interest payments each year. For many people the tax deduction is considered as a perk of being a homeowner, and for many people getting the tax break is viewed as a right. So what’s up with the government’s deficit reduction commission entertaining a proposal to change the mortgage interest deduction?

Trying to reduce the deficit

First, it’s important to understand why changes are being proposed. President Obama established the National Commission on Fiscal Responsibility and Reform to propose recommendations to cut excess spending and balance the nation’s budget. “We must stabilize then reduce the national debt, or we could spend $1 trillion a year in interest alone by 2020,” states the Commission in their draft proposal of Nov. 10, 2010.

Limiting mortgage interest

Proposed tax reform measures include limiting the mortgage interest deduction so that second homes and home equity loans would be excluded. Also, the mortgage deduction could have a cap of $500,000 instead of the current $1 million. Reaction to the proposed change in the deduction for mortgage interest has been met with concern and outrage.

Michael D. Berman, CMB, Chairman of the Mortgage Bankers Association, said in a statement:

Given the fragile state of the nation’s housing market, now is not the time to be scaling back incentives for homeownership. The mortgage interest deduction is one of the pillars of our national housing policy, and limiting its use will have negative repercussions for consumers and home values up and down the housing chain … We share the widespread concern over the growing national debt and want to help identify reasonable solutions, but we cannot support proposals that would chip away at the foundations of the real estate market.

A setback for the housing market?

Bob Jones, chairman of the National Association of Home Builders said in a statement:

Tampering with the deduction would be a major setback for today’s slowly emerging housing recovery. It would disrupt the plans of young households who are gathering their financial resources to purchase a home. And it would impose a substantial tax burden on existing home buyers, many of whom continue to stay current with their mortgage payments even as they struggle to make ends meet.

Arguing against the mortgage deduction

However, some tax experts say that the mortgage deduction should go. “What the subsidy is doing is driving up prices by encouraging well-off people to take out bigger loans, to buy bigger houses,” Roberton Williams, a fellow at the Tax Policy Center, told the New York Times. “So I think there’s a question about whether that is something the government should be doing with tax money.”

The deficit reduction commission is looking at many areas, not just mortgage interest deductions. If you feel strongly about any of the measures in the proposal, you can email comments and suggestions to the commission at commission@fc.eop.gov.

What happens during the foreclosure process?

November 6th, 2010

If you’ve received a notice of foreclosure, you may be confused about what the foreclosure process actually involves. Whether you are current on mortgage loan payments or have fallen behind, the following guide can help you understand how the foreclosure process works.

What is a foreclosure?

A foreclosure is an action by a lender to take ownership of property for which the loan is in default. It starts when a homeowner has fallen behind on home loan payments, thus defaulting on the mortgage loan. By definition the mortgage loan is secured by the value of the home, which means if the homeowner doesn’t pay the loan, the lender has the right to take the house.

Once a loan is in default, the mortgage lender will eventually attempt to recover the outstanding balance owed on the mortgage loan by taking the property and selling it to pay off as much of the loan as possible. The mortgage lender kicks off this process by filing a public Notice of Default.

What are your options after a Notice of Default has been filed?

There are several things that you can do after the foreclosure process has begun.

  1. Pay off the default. If you can find a way to pay off the default amount during the pre-foreclosure period, doing so could allow the mortgage loan to be reinstated. Work with your lender to establish a payment schedule.
  2. Sell the property. You could choose to sell the property during the pre-foreclosure period and put the proceeds toward the mortgage. Given the current economic conditions, it may be tough to sell your home at the market value.
  3. Short sale. If you are underwater on a mortgage loan you won’t earn enough from the sale to pay the full amount owed. In that case you might have to consider a short sale.
  4. Loan modification. Explore HAMP (Home Affordable Mortgage Program) and HARP (Home Affordable Refinance Program) loans to see if you qualify for a loan modification or a refinance with government assistance.

More about short sale

A short sale occurs when the mortgage lender agrees to accept less that what is owed on a home mortgage. Generally, you have to prove that you are experiencing extreme financial hardship to qualify for this type of deal. Be prepared to provide a lot of documentation for your financial woes. It’s also a good idea to line up a buyer before approaching the bank to request a short sale.

What if you do nothing?

If you do nothing after the foreclosure is started, the mortgage lender can take the property. The lender would then sell the house to recover as much as it can. The lender would be responsible for any repairs or maintenance needed to get the property in shape to sell. But mortgage lenders are not looking to manage properties, so most would rather find an alternative to having to take ownership. Armed with this information, being upfront with the lender about your situation and reaching agreement on a payment plan may make it possible for you to remain in your home.